Inflation hits 3pc as cost of living squeeze intensifies

Prices jumped by 3pc in the past year, the fastest rise in more than five years as imported inflation and higher energy prices pushed up the cost of living.

Food prices climbed as inflation in staples such as bread, rice and meat accelerated in September, while transport costs also rose as petrol became more expensive.

Computer games and theatre tickets also dragged up the consumer price index, the Office for National Statistics said.

“Our expectation that inflation will peak at about 3.2pc in October means that Governor Carney will have to get out his letter-writing pen next month,” said Paul Hollingsworth at Capital Economics, referring to the rule that Mark Carney must write a letter to the Chancellor if he misses the 2pc inflation target by more than one percentage point.

“However, we don’t anticipate he will be writing letters for long. Indeed, we think inflation will be back below 3pc by the end of this year.”

Mr Carney has indicated he intends to raise interest rates next month, a move which should combat rising prices.

“Most economists would regard this as ‘bad’ inflation because it has been driven by rising input costs and unfavourable foreign exchange impacts, rather than strong consumer demand,” said Thomas Wells, manager of the S&W Global Inflation-Linked Bond Fund. "Inflation has remained more persistent than the Bank of England had first hoped, causing Mark Carney to adopt a significantly more hawkish tone in the run up to the November MPC meeting.

“However, these hawkish comments have themselves encouraged sterling to strengthen, helping to stem further FX-related inflation without threatening the already weak GDP numbers. Given market sentiment, it appears that Carney will have to follow through and raise rates in November to maintain credibility."

The rise in prices is also painful news for companies as business rate rises next year are based on September’s retail price index. This inflation measure came in at 3.9pc, the ONS said yesterday.

Richard Lim at Retail Economics said: “On the one hand, personal finances are coming under increasing strain from rising food and transport costs which will continue to bear down on discretionary spending. On the other, it sets up the largest rise in business rates in six years, due to be implemented in April next year. We estimate the retail industry alone will be hit by an additional bill of around £300m.

“This spike in business rates will come at a time when operating costs continue to spiral upwards. Against a backdrop of softer consumer demand, it’s likely that many retailers will be unable to remain commercially viable.”